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Saturday, August 20, 2011

Why Budgets Don't Work ... yet are still important.

What do you think of when you think, "I need to write a budget in order to get my spending under control?"

Because of my job, I think in terms of a small business or non-profit budget, which is a guideline to help the business know what its goals are both in input and output of money.  But when I talk to people who do not work in accounting it sounds more like a budget is akin to being on a diet.  It means depriving yourself of what you want for the "greater good" or "the big picture" or whatever phrase constitutes suffering in order to be a "better person".  In this way budgets get a bad rap.  Budgets are not a financial diet.  They are not there to make you do the financial equivalent of "eating bird food" and never having any fun.  They are not there to punish you for your extravagant ways or teach you to never follow your dreams.

For the majority of my life I was skinny and it was easy to be that way.  Then I developed some severe health problems and gained a lot of weight and found out how hard it is to lose weight.  Dieting just made me angry - really angry.  It felt like I was being punished for gaining weight.  So, I went to a nutritional counselor and I learned how to eat to lose weight so that I wasn't suffering or depriving myself of anything.  I lost the extra weight and I didn't suffer while doing it.  That is what a budget used correctly can do for you, it can help you get a realistic idea of what you're spending and where you money is coming from, and it gives you a platform to jump from to realistically achieve your goals.

You will find a reoccuring theme for me is a solid foundation.  For a house, that means a well-built foundation that will withstand inclement weather and natural disasters, not just some bricks thrown on the ground that work just fine when things are going well but will be washed away at the first big flood.  It also means building a foundation that fits your situation.  If you live in the desert, the foundation of your home is going to be a lot different from a home a block from Lake Pontchatrain in Louisiana, where the risk of severe flooding is very high.  Having a budget will help you figure out what your foundation should be and help you build a strong one that will withstand all the ups and down of our country's financial climate.

You do not need to expect to be strapped to a budget for the rest of your life either.  Just as one should not have to be on a diet the rest of their life - and if they are something is wrong - you should not have to be checking your budget every month for the rest of your life.  My aspiration for my clients is that they start with a budget in order to get an idea of what they can and can't afford, and then check in with that on and off for the first year to make sure they are spending within their means.  After they have become confident that their new spending habits are second nature, budgets aren't necessary unless you're about to buy a big purchase (such as a house) that will require adding extra monthly payments, in which case writing a budget and a cash flow forecast is helpful to see if you can really afford it.

I will follow up more on how to write budgets and do cash flow forecasts coming up in the near future. It really is very easy once you get the hang of it, and it will help quite a bit when making plans for a huge purchase.

So, in short, budgets are a way to help you get familiar with your spending and what you can afford and are a tool to help you become familiar with your money and what you can afford to spend.  They are not strict guidelines to constrain you and hold you back from what you want in life.  Like most things in life, a foundation of a little personal responsibility and knowledge can be the platform to jump-start you to the success in life that everyone desires.

This is a cute video that I'd say was for your listening pleasure but the music kind of sucks ... but in a good way (sorry - a moment from my old music critic days!) It's a cute, tongue-in-cheek video of the same point I'm making.

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